US unveils new $800 billion plan to loosen credit

Underscoring the fragility of the overall US economy, data released Tuesday showed that the US gross domestic product shrank at a 0.5 percent rate in the July-to-September quarter, worse than the 0.3 percent of decline first estimated by the Commerce Department a month ago.

Meanwhile, the Standard & Poor's/Case-Shiller national home price index released Tuesday fell a record 16.6 percent from a year previously. Nationally, housing prices are at levels not seen since the first quarter of 2004.

That, in turn, has made it difficult for consumers to borrow. The consumer-asset backed securities market declined steeply in the third quarter and essentially came to a halt in October, according to Paulson.

That's why the government felt it had to intervene yet again, jumping into this market, says Bob Eisenbeis, chief monetary economist for Cumberland Advisors in Vineland, N.J.

"This is another manifestation of 'We'll do whatever it takes,' " says Mr. Eisenbeis.

The Fed's primary tool for getting money flowing in US credit markets is reducing the interest rates it controls, says Eisenbeis. But those rates are now near zero, greatly lessening the utility of further cuts.

"There are other mechanisms you can use to inject liquidity into the marketplace, like buy assets, and that's the way I interpret these programs," he says.

The Fed and the Treasury are in essence bypassing the banking system with these programs, and trying to get more money into consumers' pockets.

But they're still not dealing with consumers as directly as they could, according to an analysis by Robert Brusca, chief economist at Fact and Opinion Economics.

For instance, the "Fed is not making mortgage loans to individuals. It is not giving them financing," writes Mr. Brusca.

Instead, it is buying up old mortgage securities, in hopes "institutions will feel better and will lend or buy more asset-backed paper," according to Brusca.

Some Democratic lawmakers who have been critical of the Bush administration's rescue efforts in the past praised the programs unveiled Tuesday, saying too much of the government's past efforts were focused on Wall Street.

"This new focus by Treasury and the Fed should help inject some much-needed economic life into Main Street and couldn't come a day sooner," said Sen. Charles Schumer (D) of New York in a statement.

• Associated Press material was used in this report.

Previous

1 | 2